Ownership and possession of real property that is readily transferable since it is free from valid claims by outside parties.
The concept of marketability of title refers to ownership of real estate. Under law, titles are evidence of ownership. Selling real estate (land and the property attached to it) involves transferring its title. A marketable title is one that can be transferred to a new owner without the likelihood that claims will be made on it by another party. The concept is crucial in all real estate transactions because buyers generally expect to receive property to which no one else can lay claim; they do not expect that their ownership will later be challenged. Marketability of title is addressed in the contract for sale. Unless a contract for sale specifies that a third party has claims on the real estate, there is an implied provision that the seller has a good or marketable title, which the buyer will receive.
However, some real estate that is for sale will have outside claims against it. These claims are known as clouds and encumbrances. For instance, the owner of the title may have outstanding debts or owe interest that has resulted in a lien being placed on the property. The lien gives the owner's creditor a qualified legal right to the property in question, which remains in effect until the debt is settled. Because liens are long-lived (they can remain in force across generations), many states have tried to simplify land transactions by adopting marketable title acts. Generally, these laws limit the duration of a lien to a period of years during which the lien holder must take some action to satisfy the lien, or it is extinguished. Typically these laws apply to liens in existence at the time of the law's creation, as well as to future liens.
Ordinarily, contracts for the sale of real estate provide a remedy for a buyer who later discovers that the title is not marketable. If the seller has failed to provide marketable title, the buyer is permitted to rescind the sale—that is, to back out of the contract and receive a refund of the money paid for the property. Suppose, for example, that Mary buys land from Bob. The contract of sale declares that Bob holds marketable title to the land. After paying Bob, Mary receives a letter from an attorney saying that a business called Lou's Used Cars holds a lien on the property because Bob is using it as collateral for a car loan. In this case Bob has failed to provide Mary with marketable title. He will soon be hearing from her attorney, who will say that Mary is rescinding and wants her money back.